Travelers Companies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

Key Takeaways

  • Despite $1.5B of pretax catastrophe losses over 88 of 91 days, Q2 generated only slightly positive core income.
  • Underlying underwriting income rose 39% year-over-year with a combined ratio improvement of 170 basis points to 91.1%.
  • Record net written premiums grew by 14% to $10.3B, highlighted by an 18% increase in Business Insurance and a record 12.8% renewal premium change.
  • Travelers returned $633M of capital in Q2, including $400M in share repurchases, supported by strong operating cash flows.
  • Personal Insurance segment loss ratio hit 122% due to elevated catastrophe losses, despite a 2-point improvement to a 94.1% underlying combined ratio.
AI Generated. May Contain Errors.
Earnings Conference Call
Travelers Companies Q2 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the 2nd Quarter Results Teleconference for Travelers. As a reminder, this conference is being recorded on July 20, 2023. At this time, I would like to turn the conference over to Ms. Abby Goldstein, Senior Vice President of Investor Relations.

Operator

Ms. Goldstein, you may begin.

Speaker 1

The Thank you. Good morning, and welcome to Travelers' discussion of our Q2 2023 results. We released our press release, financial supplement and webcast presentation earlier this morning. All of these materials can be found on our website at travelersdot conference call. Speaking today will be Alan Schnitzer, Chairman and CEO Dan Frey, CFO And our 3 segment presidents, Greg Tyslowski of Business Insurance, Jeff Kline of Bond and Specialty Insurance and Michael Klein of Personal Insurance.

Speaker 1

The they will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks phone call and then we will take questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. The Our presentation today includes forward looking statements. The company cautions investors that any forward looking statement involves risks and uncertainties It is not a guarantee of future performance.

Speaker 1

Actual results may differ materially from those expressed or implied in the forward looking statements Due to a variety of factors. These factors are described under forward looking statements in our earnings press release and in our most recent 10 Q and 10 ks filed with the SEC. We do not undertake any obligation to update forward looking statements. The Also in our remarks or responses to questions, we may mention some non GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplements and other materials available in the Investors section on our website.

Speaker 1

And now, I'd like to turn

Speaker 2

the call over to Alan.

Speaker 3

Thank you, Abby. Good morning, everyone, and thank you for joining us today. In the face of an historic cat quarter, our top and bottom line results demonstrate the strength of our franchise and The resilience of

Speaker 4

our business

Speaker 3

model. This quarter, we reported strong underlying results and investment returns as well as net favorable prior year reserve development, the Which were essentially offset by an historic level of industry wide catastrophe losses. There were PCS designated catastrophe events taking place the on 88 of the 91 days of the quarter. Despite pre tax catastrophe losses of $1,500,000,000 We generated slightly positive core income for the quarter. We are very pleased with the underlying fundamentals of our business.

Speaker 3

Pre tax underlying underwriting income of $781,000,000 for the quarter was up nearly 40%, driven by record net earned premiums of $9,200,000,000 the And a consolidated underlying combined ratio, which improved 1.7 points to an excellent 91.1%. The. Earned premiums were higher in all three of our business segments. Underlying profitability in our Business Insurance segment was particularly strong. The The underlying combined ratio improved by 3 points to an excellent 89.4%.

Speaker 3

The underlying combined ratio in our Bond and Specialty business was higher year over year, But at 87.8 percent still generated a very attractive return. In our Personal Insurance segment, the underlying combined ratio improved by 2 points, Reflecting the actions we have taken to improve profitability. Turning to investments, our high quality investment portfolio generated net investment income $594,000,000 after tax for the quarter, reflecting stronger and reliable returns from our fixed income portfolio the and solid returns from our non fixed income portfolio. Given our confidence in the strength of our business, we returned $633,000,000 of excess capital to shareholders during the quarter, including $400,000,000 of share repurchases. Turning to production.

Speaker 3

Thanks once again to excellent execution by our colleagues in the field. We grew net written premiums by $1,300,000,000 or 14% to a record $10,300,000,000 In Business Insurance, we grew net written premiums by 18% to $5,200,000,000 Renewal premium change in the segment was a record high at 12.8%, driven by renewal rate change, which accelerated 2.5 points sequentially the 7.2%. The renewal premium change we achieved this quarter was broad based. RPC the Even with strong pricing, retention, an important indicator of marketplace stability, remained very strong at 88%. The new business increased 36 percent to $671,000,000 led by the property line.

Speaker 3

The In Bond and Specialty Insurance, record net written premiums were about even with the prior year quarter. Retention in our management liability business was an excellent 91% And new business increased 11%. Surety net written premiums were also once again strong. Given the attractive returns, We are very pleased with the strong production results in both of our commercial business segments. The growth we're putting on the books is from geographies, products and distribution partners that we know well.

Speaker 3

The In Personal Insurance, top line growth of 13% was driven by higher pricing. Premium change was 19.2% in our Homeowners and Other business the and increase to a record high 16.1 percent in our auto business. Another quarter of terrific production across the Board positions us well for the rest of the year and into 2024. We'll hear more shortly from Greg, Jeff and Michael about our segment results. The Before I turn the call over to Dan, I'd like to spend a few minutes on what Travelers is doing in an important area for us, artificial intelligence.

Speaker 3

We subscribe to the view that over time, the impact of AI across the economy is going to be profound. So is the opportunity for travelers. The With our performance transform mindset and our disciplined framework for assessing our investment priorities, we've been focused for years on the Responsibly developing differentiating AI capabilities across our 3 innovation priorities: extending our leading risk expertise providing great experiences for our customers, agents, brokers and employees and optimizing productivity and efficiency. The Between our colleagues who are dedicated to AI specifically and others in enabling disciplines, we have a very significant number of our employees engaged on the objective of making sure that we're leading when it comes to AI. As we've shared before and as you can see on Slide 23 of the webcast presentation, the For some time, we've been steadily increasing our technology spend.

Speaker 3

This year, we'll spend more than $1,500,000,000 on technology. The As the slide demonstrates, we've also been improving the strategic mix of our tech spend. That includes a meaningful increase in investments Develop or require cutting edge AI capabilities built on modern cloud technology. Importantly, the We've done all that while significantly improving our expense ratio, in no small part, thanks to the success of our technology investments. The The quantity and quality of data are key differentiators when it comes to AI.

Speaker 3

For more than a decade, we've been investing in data sets, data quality and data accessibility. Between submissions in our commercial businesses and quotes and PI, the We intake millions of business opportunities each year. We also take in, adjust and adjudicate millions of claims. We're one of the largest risk control organizations in the industry. We provide risk mitigation to our commercial customers, completing more than 100,000 risk control consultations annually.

Speaker 3

The we capture valuable data from virtually all of those interactions. Our data also include decades of curated institutional knowledge in the forms of policies, procedures, guidelines, forensic investigations and so on. All of that creates an excellent foundation for the next iteration of generative AI. The In addition to our extensive proprietary data, we've been assembling actionable third party data for years. In fact, we have more than 2,000 data sets from 100 of third parties.

Speaker 3

All in, we believe that we have a significant and hard to replicate data advantage. The Given the competitive advantages that will come from deploying AI across the insurance value chain and the expertise, resources and data required to get there, the Scale will increasingly be a differentiator in our industry, as will the ability to execute complex initiatives effectively and efficiently. The expertise, resources, data, scale and execution excellence all favor travelers. The The potential use cases for AI in our industry are many and varied. We pursue very focused opportunities that are consistent with our innovation priorities the and will create meaningful and sustainable competitive advantages, all with an eye towards leveraging strategic capabilities across our organization.

Speaker 3

The AI capabilities that we currently have in production span the spectrum from those driving efficiency through automation the to more advanced generative AI and large language models. More advanced models augment various aspects of our underwriting, claim handling, service delivery and other work. We use intelligent process automation broadly throughout our business to handle hundreds of routine workflows. The Automation and AI have been meaningful drivers of our expense ratio improvement over the past 7 years or so. A key success driver in insurance the and segment risk in our flow businesses.

Speaker 3

For example, in personal insurance, we leverage proprietary AI and aerial imagery to assess roof and other site related conditions at the parcel level. Parcel level risk assessment at scale was practically unimaginable until several years ago. And that type of information is very difficult to obtain from the insured with a reliable degree of accuracy. The In our select accounts business, we estimate that AI has improved business classification, a critical underwriting input, by more than 30%. The In our middle market business, we've developed a suite of sophisticated AI models, which facilitate targeted cross selling, supporting our effort to sell more products to more customers.

Speaker 3

We're also using AI to better understand our customers and their needs. The. To this improve customer segmentation, we can better align new product development and generate insights that improve the customer experience. The enhancing our industry leading analytics, using machine learning models to deliver sophisticated actuarial insights into loss cost trends and development, the which improve our already strong pricing and product monitoring capabilities. On the most advanced end, We're leveraging generative AI and large language models and we've been doing so for several years.

Speaker 3

For example, in our Bond and Specialty business, Our proprietary large language models have processed hundreds of thousands of broker submissions as we work toward improving intake time from hours to minutes. This will improve our responsiveness to our customers and distribution partners and contribute to our productivity. In our claim organization, the proprietary large language model ingests legal complaints filed against our insureds and then highlights key liability and coverage issues, the assist in routing the cases to the best suited defense counsel and provides risk related insights that could be incorporated back into our underwriting process. We've also developed and are piloting a traveler's claim knowledge assistant, a generative AI tool trained on many thousands of pages of proprietary technical source material that was previously only accessible through thousands of different documents. The model provides claim professionals with the ability to easily the assess accurate, actionable information on technical and procedural claim matters, increasing speed, accuracy and consistency in various workflows, including in interactions with our customers and distribution partners.

Speaker 3

So in terms of AI, we're investing with speed and strategic direction, the consistent with our stated objective of delivering industry leading returns. I've only shared some of what's in flight and the capabilities that we've developed are in various phases of adoption. The full impact of the capabilities we're developing and others on our road map are still ahead of us. The To sum things up, we are very confident in the outlook for our business. We have terrific underlying fundamentals in our commercial businesses, improving underlying results in our personal insurance business and steadily rising investment returns in our fixed income portfolio.

Speaker 3

The As you've heard, we're also investing in impactful new capabilities to advance our ambitious innovation agenda. With that momentum and the best talent in the industry, We are well positioned to continue to deliver meaningful shareholder value over time. And with that, I'm pleased to turn the call over to Dan. The Thank you, Alan. We're pleased to have generated record levels of earned premium this quarter and an underlying combined ratio of 91.1%, the 170 basis point improvement from last year's strong results.

Speaker 3

This led to a very strong underlying underwriting gain of $615,000,000 after tax, up $171,000,000 or 39% from the prior year quarter. The The expense ratio for the Q2 improved 40 basis points from last year to 28.6%, once again benefiting from the combination of our focus on productivity and efficiency coupled with strong top line growth. The As Alan mentioned, the industry experienced a very active cat quarter. And our 2nd quarter results include $1,500,000,000 of pre tax catastrophe losses, our 2nd largest ever catamount for a second quarter. As disclosed in the significant events table in our 10 Q, We had 6 events surpass the $100,000,000 mark in Q2, the most ever for a single quarter since we began disclosing the table in 2013.

Speaker 3

Turning to prior year reserve development, We had total net favorable development of $60,000,000 pretax. In Business Insurance, net Favorable PYD of $101,000,000 was the result of better than expected loss experience in workers' comp across a number of accident years the being more than offset by an increase in some of our other casualty reserves as well as for runoff operations. The In Bond and Specialty, net favorable PYD of $119,000,000 was driven by better than expected results management liability and surety. Personal insurance had $42,000,000 of net favorable PYD driven by homeowners and other. The.

Speaker 3

After tax net investment income of $594,000,000 was in line with the prior year quarter. Fixed maturity NII was again higher than the prior year quarter, reflecting both the benefit of higher average yields and higher invested assets. The. Returns in the non fixed income portfolio were solid, but as expected, were not as strong as the double digit yield we experienced in the prior year quarter. The With interest rates having moved higher during the Q2, we are raising our outlook for fixed income NII, including earnings from short term securities the by $35,000,000 after tax for the back half of the year.

Speaker 3

We now expect approximately $570,000,000 after tax the Q3 and $595,000,000 after tax in the Q4. New money rates as of June 30 are about 140 basis points higher than what's embedded in the portfolio. So fixed income NII should continue to improve the portfolio gradually turns over and continues to grow. Turning to capital management. Operating cash flows for quarter of $1,500,000,000 were again very strong.

Speaker 3

All our capital ratios were at or better than target levels, We ended the quarter with holding company liquidity of approximately $2,000,000,000 In late May, we issued $750,000,000 the 30 year debt in order to maintain a debt to capital ratio in line with our target range as our premium volume has continued to grow. Interest rates increased and spreads widened during the quarter. And as a result, our net unrealized investment loss increased from $3,900,000,000 after tax at March 31 to $4,600,000,000 after tax at June 30. As we've discussed in prior quarters, the changes in unrealized investment gains and losses generally do not impact how we manage our investment portfolio. We generally hold fixed income investments to maturity.

Speaker 3

The quality of our fixed income portfolio remains very high the and changes in unrealized gains and losses have little impact on our cash flows, statutory surplus or regulatory capital requirements. The adjusted book value per share, which excludes net unrealized investment gains and losses, was $115.45@quarterend, the up 1% from year end and up 3% from a year ago. We returned $633,000,000 of capital to our shareholders this quarter, comprising share repurchases of $400,000,000 and dividends of $233,000,000 We have approximately $6,200,000,000 capacity remaining under the share repurchase authorization from our Board of Directors. Since the significant level of Flat losses in late June resulted in lower earnings for the quarter than we had anticipated. We expect the level of share repurchases over the back half of the year to be lower than the level of share repurchases in the first half of the year.

Speaker 3

Turning to the topic of reinsurance, the Page 20 of the webcast presentation shows a summary of our July 1 reinsurance placements. While we did see some meaningful price increases on our reinsurance renewals. Those increases were broadly in line with the price increases we are obtaining on the direct property premiums we're writing. So there's little or no impact expected on margins. Let me take another moment to highlight a few items on Page 20.

Speaker 3

First, we renewed our main cat reinsurance program at terms that were generally consistent with the expiring program. The 2nd, we increased the coverage under our Northeast Property Treaty by fully placing the $850,000,000 layer above the attachment point of $2,500,000,000 A year ago, we placed $750,000,000 of that $850,000,000 layer And the attachment point was $2,250,000,000 This treaty remains pretty far out on the tail for us. Finally, as part of our ongoing management of tail risk exposure for the enterprise and in response to inflation driven growth In insured values in our personal insurance property book, we added a new hurricane cat excess of loss reinsurance program the specific to personal insurance coastal exposure, providing 50% coverage for the $1,000,000,000 layer above an attachment point of $1,750,000,000 again, far out on the tail. Any margin impact from this new program will be de minimis, given both the size of our PI property book and the level of price increases we are obtaining on that book. The To sum up the quarter, our ability to absorb $1,500,000,000 of pretax cat losses and still report slightly positive core income for the quarter the is a testament to the overall strength of our franchise and the underlying fundamentals of our business.

Speaker 3

Q2 was another quarter of double digit premium growth, improved underlying profitability and further improvement in our outlook for fixed income NII, all of which bodes well for our future returns. With that, I'll turn the call over to Greg for discussion of Business Insurance.

Speaker 4

The Thanks, Dan. Business insurance produced $402,000,000 of segment income for the Q2, down from the prior year quarter driven by prior year reserve development and higher cats, as Dan mentioned. Underlying underwriting results continue to be exceptional, the fiscal year 2020 with underlying underwriting income up more than 50% from the prior year quarter. We're once again particularly pleased with quarter's underlying combined ratio of 89.4%, which improved by 3 points from the prior year quarter. The The loss ratio benefited from property losses that were about a point and a half better than our expectations for the current year quarter.

Speaker 4

The The loss ratio also improved due to earned pricing. The expense ratio remained strong at 30.1%. The Net written premiums increased 18% to a quarterly record of $5,200,000,000 driven by renewal premium change of 12.8%, retention of 88% and new business of $671,000,000 the All record highs. Underneath RPC, renewal rate change accelerated sequentially from the 1st quarter by 2.5 points to 7.2%. We're thrilled with these production results and the superior execution by our field team in the marketplace.

Speaker 4

The In terms of pricing, we're pleased with our response to the persistent environmental headwinds in both the property and liability lines. The In each of our product lines, renewal premium change was higher than the Q1. And beyond pricing, we Continue to improve terms and conditions to ensure we're achieving an appropriate risk reward trade off on the business we write. As we always say, we execute in a granular manner, deal by deal, class by class. And to that point, we're thrilled with our execution, demonstrated by record retention of 88% on our very high quality book of business in a rate that is thoughtfully segmented by return profile.

Speaker 4

The new business as a percentage of the book returned to pre pandemic levels led by the property line. The We're pleased with new business dollars at an all time high. And as always, when it comes to new business, we remain focused on risk selection, underwriting terms and conditions and pricing. We're also very pleased with the impact that our strategic investments are having on our production results. The As for the individual businesses, in Select, renewal premium change was up a point from the Q1 to a strong 10.6%, the while retention also remained historically high at 84%.

Speaker 4

New business increased $30,000,000 or 28% the from the prior year quarter, driven by the continued success of our BOP 2.0 product. In middle market, renewal premium change was up more than 2 points sequentially from the Q1 to a historically high 10.5 percent the With renewal rate change increasing sequentially by 1.5% to 5.9% and continued strong exposure growth. The retention was once again exceptional at 90%, while new business was up 32% the from the prior year quarter with increases across all account sizes in most markets. To sum up, Business Insurance had another strong quarter And continue to execute on the fundamentals to drive profitable growth. With that, I'll turn the call over to Jeff.

Speaker 5

The Thanks, Greg. Bond and Specialty posted strong top and bottom line results for the quarter. Segment income of $230,000,000 was up slightly from the very strong prior year quarter. The combined ratio was a terrific 77.1%. The The underlying combined ratio was a solid 87.8% for the quarter.

Speaker 5

A small number of surety losses drove the roughly 4 point increase in the underlying loss ratio year over year. As we've said before, surety losses can be a bit lumpy. The Even with the incremental losses this quarter, our returns in the surety line remain excellent. Turning to the top line, We delivered record net written premiums this quarter. In domestic management liability, we are pleased that we drove record retention of 91% in the quarter, the up 2 points sequentially and 3 points from the Q2 of 2022, while continuing to achieve solid renewal premium change.

Speaker 5

The This result reflects our team's deliberate execution to retain our high quality book of business in light of the very strong returns. The We're also pleased that we increased new business 11% from the prior year quarter. That's a reflection of the strong franchise value we offer to our customers distribution partners and a lot of hard work by our team in the field. Additionally, we're pleased to report record surety net written premiums in the quarter. So both top and bottom line results for Bond and Specialty were once again strong this quarter, driven by our continued underwriting and risk management diligence, the excellent execution by our field organization and the benefits from our ongoing strategic investments to extend our market leading competitive advantages.

Speaker 5

And now I'll turn the call over to Michael.

Speaker 6

Thanks, Jeff, and good morning, everyone. In Personal Insurance, the 2nd quarter segment loss $538,000,000 and the combined ratio of 122% were significantly impacted by catastrophes. While it's not unusual for us to have a loss in the second quarter, given it's typically the quarter with the highest weather related losses, fee losses this quarter for both us and the industry were significantly elevated compared to historical results. Net written premiums for the quarter grew 13% Driven by double digit renewal premium change in both domestic automobile and homeowners and other. The underlying combined ratio of 94.1% improved 2 points from the prior year quarter, reflecting an improvement in the underlying combined ratio in homeowners and other, partially offset by an increase in automobile.

Speaker 6

The In automobile, the 2nd quarter combined ratio was 108.4 percent with an underlying combined ratio of 103.5%. The The underlying combined ratio increased 1.7 points from the prior year quarter due to higher severity Driven by increased vehicle replacement and repair costs and a mix shift from collision only claims towards claims with bodily injury and third party property damage, Which is more consistent with more cars on the road leading to more multi car accidents. These increases were partially offset by the growing benefit of earned pricing And a lower expense ratio. While some of the inflationary pressures in auto are beginning to show signs of easing, they are not improving at the rate we expected. Consequently, we're not yet achieving the written rate adequacy levels we had anticipated.

Speaker 6

While we continue to make progress and expect to get there in the coming quarters, Exactly when will depend on a few things. For example, how quickly inflation comes down, how quickly we can get additional rate through the regulatory process and our actual loss experience. In Homeowners and Other, the 2nd quarter combined ratio of 135.1 percent increased 17.1 points due to significantly higher catastrophe losses. The underlying combined ratio of 85.2% improved 5.1 points, the primarily driven by non cat weather losses that were lower than in the prior year quarter. Non cat weather losses in the quarter were also better than our expectation as more events reached our catastrophe threshold.

Speaker 6

Turning to production, our results continue to demonstrate disciplined market execution of rate and non rate actions in both lines as we remain focused on improving profitability and managing growth in response to continued inflationary pressures in the environment. In domestic automobile, renewal premium change of 16.1% increased 2.1 points from the Q1 of 2023. We expect renewal premium change to continue to increase from current levels throughout the second half of this year. In domestic homeowners and other renewal premium change of 19.2% was broadly consistent with the Q1. We expect renewal premium change To remain in the high teens through the end of the year.

Speaker 6

Before I conclude, I just want to take a minute to thank our claim partners for responding to our customers when it matters most. The Behind the aggregate statistics of catastrophe events occurring virtually every day of the quarter are tens of thousands of individual customers whose homes and vehicles are damaged or destroyed and whose lives are disrupted. In each case, our claim team is responding, helping those customers get their homes repaired And our car is back on the road, continuing to deliver high quality customer service despite the high volume of claims. The Both the loss environment and the personal insurance marketplace remain dynamic. We continue to respond to the changing environment with a steadfast focus on execution.

Speaker 6

Quickly addressing changes in loss experience with targeted pricing, underwriting and other non rate actions, remaining disciplined in writing business that is consistent with our appetite and making thoughtful and impactful investments for

Speaker 3

the future. We're confident that

Speaker 6

the actions we've taken and will continue to take We'll improve profitability as we move through 2023 beyond. Now I'll turn the call back over to Abi.

Speaker 1

Thanks, Michael. We're ready to open up for questions.

Operator

The Your first question comes from the line of Greg Peters of Raymond James. Please go ahead.

Speaker 7

The Well, good morning, everyone. I guess, notwithstanding Michael's comments, I'm just curious about the If there's going to be any shift in the strategy on property considering what's going on with catastrophe losses. The And I'm also trying to triangulate or bridge the difference between personal lines, which clearly was the A negative surprise. And I think, Greg, in your comments, you said property actually was a better, a net gain for you guys relative to expectations. So Any broad comments on your views on property in light of the cats and in the different segments too, please?

Speaker 6

Sure. So I can start on the property side, Greg. Certainly, the catastrophe experience in the quarter was significantly worse than prior year the and worse than our expectations. In terms of a shift in strategy, what I would say is we continue to execute the series of actions in the property line to manage growth and improve profitability. And again, 1st and foremost, you see that in the pricing, in the production statistics the that was shared with you in the webcast.

Speaker 6

But beyond that, we're managing terms and conditions, think deductibles, Think roof age eligibility, think coverage levels on roof replacement And a variety of actions that we look at very granularly, state by state, market by market, account by account. The And then one of the other things we're really encouraged by, Alan mentioned in his discussion around artificial intelligence, is our aerial imagery the And the artificial intelligence enabled capability we have there to refine our underwriting on our risk selection. So the Less a shift in strategy and more a continuation of a really broad array of profit management and profit improvement efforts in the personal lines property the phase.

Speaker 4

Hey, Greg. This is Greg. Just to follow-up on the commercial side. So many times the catastrophes, the split between personal and commercial can be It really depends on the concentration of where the catastrophes hit in terms of where commercial businesses are. In terms of your comment, I think you're reference in my prepared comments when I was explaining the underlying combined ratio and I mentioned that property was better than expectation and that really was non cat property.

Speaker 7

Got it. All right. Thank you for the answers. And then I guess I'll pivot. Greg, also during your comments, the You talked about reserve development.

Speaker 7

Maybe spend a minute, don't really touch upon workers' comp, but the adverse development other lines.

Speaker 3

Hey, Greg, it's Dan Frey. I'll take the PYD comment. So in the quarter for Business insurance, as we said, overall unfavorable $101,000,000 Comp continues to be favorable. The comp favorable was very This quarter more than $250,000,000 of good news. So that leaves us with the other liability lines, including runoff the being unfavorable.

Speaker 3

And that's really led by Umbrella, which is sort of the poster child for perpetual the core levels of inflation just compounding and pushing more claims up into the umbrella layer. But a couple of things to put that in context, I guess. We're making a relatively small adjustment to those liability lines given the fact that There are more than $15,000,000,000 worth of reserves in those lines. The returns in BI continue to remain excellent. The And across the company, just remind us including the good news coming out of Bond and Specialty, which is also liability type coverage.

Speaker 3

We had net favorable $60,000,000 for the quarter.

Speaker 7

Got it. Thanks for the answers.

Operator

Your next question comes from the line of David Motum Badin of Evercore ISI. Please go ahead.

Speaker 8

Hi, thanks. Good morning. I had just a the follow-up question just on the adverse prior year development. I guess, what does that do to your view of future loss cost the Friends. It sounds like some of it is runoff, but also some of it is more business that you're obviously still writing.

Speaker 8

So I'd I'd be interested in how you've changed your 5.5% to 6% loss

Speaker 3

trend assumption. Yes. David, good morning. It's Alan. Thank you.

Speaker 3

Two things In response to that, one, I would say that, I would just point you to the combined ratio and underlying combined in BI in the quarter. And obviously, We think about how prior year development influences that through base year changes and you can see a pretty solid result. The And as we've shared with you before, I always want to just preface this by saying it's a very blunt instrument to try to capture what's going on across 1,000,000,000 of dollars premiums in a single loss trend metric. Every line has its own dynamics. And the question usually comes in, in terms of loss trend, but of course, there's base year changes, there's exposure changes, there's other adjustments to loss activity.

Speaker 3

So always puts and takes in all those measures. But all in, I'd say there really hasn't been much significant change. And I would go back to a comment that Dan made. The On $15,000,000,000 of reserves, this is a relatively small adjustment. And we're always every quarter looking at all our reserves.

Speaker 3

And sometimes they go up, sometimes they go down, but relatively small. And as Dan said, the returns in BI continue to be exceptional. The

Speaker 8

Got it. Thanks. And then I guess I should just take that. I mean, it's obviously a very fluid environment. But I guess it would the fluid macro environment.

Speaker 8

It would seem that just given the reacceleration in renewal rate change, the The gap between written rate and loss trend has been expanding. The I guess, is that the right take? Or is there anything else that I'm missing there? Obviously, we have to take catastrophes into account. The But there are I know Fidelis has come in.

Speaker 8

I'm just wondering if there's anything else I'm missing on the underlying loss ratio.

Speaker 3

The No. I mean, other than Greg mentioned in the script that the Non cat property losses came in a little better than we thought. But for the most part, I think the way you size it up is about right. The Yes. And David, it's Dan.

Speaker 3

I'll just you mentioned Fidelis. I mean, we said at the beginning of the year that Fidelis was not going to be big enough to have a meaningful impact on the underlying combined ratio and that's still the case, including Q2. But I think you got it right, David.

Speaker 8

The Thank you.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Brian Tunis of Autonomous Research. Please go ahead. The

Speaker 9

Hey, thanks. Good morning. So yes, Alan, I hear you that you got $15,000,000,000 reserve. The Sometimes they go up, sometimes they go down. But I guess I'd say they don't usually go the Up by this much in a given quarter, especially when there's so much workers' comp reserve releases.

Speaker 9

And I mean, there's also like a pretty sharp acceleration of pricing. So it does look from the outside like, I don't know, maybe you guys are seeing something new or you've identified something from a trend effective. I guess, just anything in this review, what have

Speaker 3

you learned this year that

Speaker 9

I guess you might not have known a year ago?

Speaker 3

The Let me start, Ryan, and then I'll turn it over to Dan. But we're squaring triangles and we're doing we're applying actuarial analytics to the series of triangles and historical losses. And that's really how we're coming up with this. I mean that the overwhelming thing that all of us are looking at Is higher levels of economic inflation. And so that is no doubt a contributor here.

Speaker 3

Yes, Ryan. The only thing I think I'd add to Alan's comments, which I agree with, we've said, as people have asked over the last several quarters and pricing has continued to be strong for quite a while now. Is that sustainable? And here you see it ticking up. And I think we just keep going through the litany of the Pricing is going to be a reaction to what's your return target and what's happening in the loss environment.

Speaker 3

So the We talk about continued increased frequency and severity of weather losses and you see that certainly this quarter. The headline inflation, social inflation that we said never went away and an uncertain overall macro environment. So those things continue to factor into our pricing. Those things also get evaluated every quarter and every year in terms of our view of loss trend in prior year reserve development. So what you're seeing here again across the place, net favorable prior year reserve development, I get the focus on the liability lines.

Speaker 3

The So but really what you're seeing there is a degree of difference as opposed to some surprise. We've been talking about inflation for a long time and we were the first people to be talking about social inflation and never thought that went anywhere. So directionally, it's not a surprise. It's just an adjustment to the order of magnitude. The Got it.

Speaker 9

And then for Michael and maybe Greg. I guess on the cat front, I mean, you guys were highlighting the frequency of events, but it seems like to me that severity must be at least as big of a contributor. Could you maybe, I guess, talk about yes, in other words, I don't think I would have ever expected $1,000,000,000 of personalized tax with 6 PCS events. So from a severity perspective, like how what's weighing on it here? Is it like the size of the hail?

Speaker 9

In other words, like the nature of the weather? The Or how much it means elevated repair cost, demand surge, like that type of thing?

Speaker 6

Sure, Ryan. It's Michael. The Yes. All of that. So I think your point is a good one.

Speaker 6

So if you look at the quarter, I think the number of events, the PCS designated events was 19. That is above the long term average. So there's a frequency of events that's higher. The And that's a relatively high number for Q2. But actually the majority of it really is severity.

Speaker 6

Now the Some of that severity to your point is the underlying weather activity itself. I think on average, the events the In this Q2 impacted about 8 states apiece as opposed to 6 states apiece. So they were a little broader, and more all encompassing the Then again historical averages, so you've got the number of events and then the size and magnitude. The There certainly are anecdotal evidence of more severe, larger hail, those types of things. But the other item that you mentioned the It really is as big, if not, a bigger factor than sort of the frequency and the magnitude of the events.

Speaker 6

And that's Just insured values and cost to repair and the severity pressures that we've been talking about across both auto and property and frankly any first party Coverages that we offer as an organization, really exacerbating that. So, I think it's all of those things, but it's at least as much a severity issue, and at least as much driven by economic inflation the As it is the weather activity itself.

Speaker 4

And Ryan from a business insurance or commercial point of view, we weren't Immune from some of the same dynamics that Michael just articulated. I think we just have a broader array of products the That you get a little more diversification when you add the workers' comp to GL and all the other products on top of that.

Operator

The Thank you. Your next question comes from the line of Alex Scott of Goldman Sachs. Please go ahead.

Speaker 9

The Hi, good morning.

Speaker 10

First one I have for you is on the business insurance underlying loss ratio improvement. I I was hoping you could help us unpack it a little in terms of workers' comp versus maybe the other products. Certainly, the reserve developments is sort of a good indication of how healthy things are in workers' comp, but pricing is down. I mean is that a business line that's helping the underlying improvement year over year or is it detracting from it? Could you kind of dimension that and help us think through some of the underlying drivers.

Speaker 3

Yes, Alex, it's Dan. We're really We don't do profitability by line. We're not going to go into that level of detail. You call out comp, it has been a good line for us. It Continues to be a good line for us.

Speaker 3

But really the way to think about BI is the blend of the products and that's the level at which we'll talk about the underlying.

Speaker 11

The Okay.

Speaker 10

The second question I had is on pricing. There is, I'd say, more reacceleration in your pricing than we're hearing from, I guess, Marsh earlier today and some of the parameters that are out there and so forth. Anything that's unique around the way you're approaching the market there. And could you help dimension at all, how much of that reacceleration of pricing is the ferry for the reinsurance costs you mentioned. It sounds like maybe loss cost trend hasn't moved that much, the But help us think a little bit about how much of that can help you tread water versus allow more underlying improvement?

Speaker 12

The

Speaker 3

I think we're going to try to stay away from forecasting margins. And the I think it may have been David who went to this question earlier and just said real premium change is close to 13 and you're There's not a lot of movement in loss trend. Should we take it on face value? I think broadly the answer is yes. But the Really, I think what's going on here is there are some headwinds.

Speaker 3

There's reinsurance costs are higher, inflation is higher, we're in a tight labor market, the There's weather and so on. So we're reacting to all those things. And on the other hand, after years of pretty good pricing, returns are in a pretty good place. And the Hat Software field organization, they are threading that needle incredibly well. And returns are were excellent.

Speaker 3

And the We're pricing to continue to maintain and maybe even improve the returns.

Operator

Your next question comes from the line of Elyse Greenspan of Wells Fargo. Please go ahead.

Speaker 13

The Hi, thanks. Good morning. My first question, within BI, the underlying loss ratio the Improved, when we look at the quarter, right, the improvement year over year was about 300 basis points. And And I know you guys said that there was 150 basis points from better property results. I think that was 1 point negative the Last year, so if we're looking year over year, is it right to say it was 2.5 points better on property and then the remainder like 50 basis points is earned rate over trend or is there something else going on?

Speaker 13

And I know that's just kind of looking all in, but something else going on with the margins in the quarter?

Speaker 3

The Yes, Elyse, it's Dan. So I think you're thinking about the property piece the right way. And then there's 50 basis points left over and Greg mentioned the continued benefit of earned pricing. That's not the only thing going on in there. As always, There are pluses and minuses.

Speaker 3

We're trying to call out the main drivers for you and those are the 2 main drivers. If there was Anything else of real significance, I think we do a pretty good job trying to make sure we include that in the commentary.

Speaker 13

The Thanks. And then my second question, the RRC improved a good amount sequentially. It sounds like that was the broad based and property and liability 9s. I know this is obviously a bigger quarter for property in terms of business mix. The I just want to get a sense of just confirm that I'm thinking about that right, that it was more than just property that drove the improvement in the RRC And how should we think about any color you could just give in terms of that RRC as we think about the Q3 and beyond?

Speaker 3

Are you talking about renewal price change, Elyse? Is that

Speaker 13

Well, I was talking about the renewal rate, but renewal rate, yes, in BI.

Speaker 4

The Yes, Elyse, you're right. I mean, clearly, we had a real strong quarter in terms of both the rate and exposure in property, but we also had significant movement across the rest of the portfolio also, the Again, in both rate and exposure.

Speaker 3

I'd say, Elyse, if you're asking whether it was broad based or narrow, I think the answer to that, it was broad based.

Operator

The. Thank you. Your next question comes from the line of Brian Meredith of UBS. Please go ahead.

Speaker 11

Yes, thanks. A couple here. First for Jeff, I know you talked about the sturdy losses just being a couple and they can be lumpy. But are we seeing any signs of maybe some pressures in that line from a loss cost perspective given what's going on with the real estate and other things that are happening right now.

Speaker 4

Hey, Brian, it's Jeff. Thanks.

Speaker 5

The I would say that we're watching inflation in materials and labor costs relative to construction. The But honestly, really, I think the prepared remarks really summed it up for you, right? We had a couple of losses They drove the underlying loss ratio change and ultimately this can be a lumpy line and we feel really good about our market leading surety book.

Speaker 11

The Higher interest rates matter also? I mean, when you get a big cut big jump in financing costs, right, first

Speaker 5

Sure. The credit availability for our contractors is absolutely an issue. We take that into account with our high credit quality book of business the way we underwrite this book. We got a high quality book of contractors that we focus on there. The And so your point is well taken.

Speaker 5

It's a part of the underwriting process. That's where I'd leave it. Thanks for the question.

Speaker 11

Thanks, Jeff. And then, Michael, I'm just curious, can you talk a little bit about kind of the regulatory environment right now in personal lines? The Obviously, some states are getting a little more condominium rate, but are we seeing any pushback kind of starting to emerge from certain states as far as the level of rate going through?

Speaker 6

The Yes, Brian. Thanks for the question. And I think it's an astute observation. As we talk about pretty consistently, we feel pretty good about our relationship the Just with the Department of Insurance, we really endeavor to make sure they have all the information necessary to evaluate and approve our rate increase requests. The And starting with us, we continue to file for increases that align with our most recent experience and our indicated rate needs.

Speaker 6

The That said, and what we're seeing and you're seeing in the headlines, some news about increased scrutiny and or the states considering or proposing changes to the way that they regulate pricing in response to the continued parade of increases necessary to keep up with loss costs. And so I'd say on the margins, there's a couple of places where it's getting a little more challenging. The But broadly speaking, we have still been able to file and get approved the rate we think we need in response to the increased costs.

Operator

The. Thank you. Your next question comes from the line of Josh Shanker of Bank of America. Please go ahead.

Speaker 12

The Yes. Thank you. Alan, you began the conference call with a preamble on artificial intelligence and analytics. The It's been an unusual 3 years in terms of interpreting loss cost trends with the courts being open and closed during COVID and the very wildly changing conditions under loss trend. Is the data quality that you are looking at right now the Any less reliable in your mind than you think it normally is?

Speaker 12

Are we in a state where extra caution needs to be placed the I'm being comfortable with those numbers that you're using for reserving practices.

Speaker 3

I would say the answer to that Josh is yes. And I think we've said pretty consistently over the last few years the That we have been cautious in reflecting that level of uncertainty into the way we think about loss costs and reserves. So I think the answer is yes, and we've been Doing exactly that.

Speaker 12

And then I mean, look, we're all just throwing shells from the cheap seats a little bit. Can you talk a little bit about the Some of that, how you get more conservative or how you in a time of uncertainty, how you get better the What you're doing in order to offset the risks associated around with bad data and whatnot?

Speaker 3

Yes. It's probably a longer conversation, Josh. We can follow-up. But let me just give you one example, and I think we've said this over the last couple of years. If you were just looking at the data,

Speaker 6

You

Speaker 3

might have assumed that some aspects of loss trend had improved over the last couple of years and whether that's true in personal insurance and you see the lack Negative PYD and personal auto, for example, or if you look at social inflation, we said as the courts were closed that the That data could have been misinterpreted to mean things were getting better. You look at that data and you say, I don't believe it. And we understand that it's Distorted and that there are other things that could be impacting it. And so we're going to do the best we can to try to understand where the uncertainty coming from and to make sure that we're reflecting our view of uncertainty as we're thinking about either our prior year reserves or managing our current loss picks.

Operator

Thank you. Your next question comes from the line of Meyer Shields KBW. Please go ahead. Thanks.

Speaker 3

I want to

Speaker 14

start with a question on personal lines. Michael mentioned that the deceleration in claim cost inflation the wasn't as strong as the UDENYX anticipated. And I was hoping you could give us some color on what, I guess the indicators that you've previously used, what they're suggesting for the personal loss cost inflation for the back half of the year.

Speaker 6

Sure, Mayor, I don't know the That the external indicators that we look at are significantly different than the ones you look at or You have available. What I can say is auto severity has sort of remained stubbornly in the low double digits, the And we had not anticipated that it would remain in double digit territory for this long. The I think the other thing I commented on in my prepared remarks was that we are seeing some signs of easing. The The predominant thing I'm talking about there is the Manheim Wholesale Index. And again, an update just came out this week the On that and I believe Manheim's estimate now is that used car prices will end 2023 below 2022 levels.

Speaker 6

But importantly, that's just one element of our loss costs, right? So wholesale car One of the reasons you continue to see double digit pressure on severity is continued elevation in repair costs, labor materials, the etcetera. And then again, we've talked about the Just broad based severity pressure. I think what we are seeing is some of the potential good news that we're starting to see in the the physical damage coverages is being offset a little bit by this shift in mix to more claims of bodily injury and property damage. And so the On a mix that mix impact impacts those loss costs as well.

Speaker 6

But again, the short answer is we're still seeing low double digit trends the In auto severity and we hadn't anticipated that they would last this long.

Speaker 14

Okay, perfect. That's helpful. The A broader question. When we look at, I guess, whether it's possibly changing weather patterns or the mix the shift within BI slightly towards property or just inflation pushing more weather losses above the

Speaker 3

CAT threshold. The How do

Speaker 14

you think about sort of the magnitude of coming years catastrophe load compared to where you've been recently?

Speaker 3

The I'm not sure we're quite ready to talk about that or to certainly give the An outlook for that, obviously, as we start to put our views together for 2024 and beyond, we'll think about the experience that we've had this year and in recent years and other factors, whether that's changes in exposure in our book or the other things and we'll come up with a view that we hope will be, sort of thoughtful and appropriate.

Speaker 6

The.

Operator

Thank you. We have time for one more question. Your next question comes from the line of Tracey Bangui of Barclays. Please go ahead.

Speaker 2

The Thank you. Good morning. My focus these days is on latent liabilities and I especially appreciate your legal perspective Given your background, Alan, and I'm not sure if A. J. Is on the call or not.

Speaker 2

The last quarter, you indulged me by talking about this. And this quarter, I'm wondering if you can indulge me again and the About PFAS. Sorry, in advance, my question is quite meaty. Is PFAS a chemically a chemical Expletally excluded from GL, like included in a pollution exclusion. And for pre-nineteen eighty six exposure, does the statute of limitations apply?

Speaker 2

The

Speaker 3

Yes. Tracy, it's hard to answer a question like that without a claim in a policy. So I'm going to the Avoid that. And we're happy to take this offline with you and talk a little bit more about it if we can do that consistent with Reg FD. About PPaaS, What I would say about that is this issue has now been around for a while.

Speaker 3

What we know about it is reflected in our reserves and I'm not sure there's a lot more to say about it at this point.

Speaker 2

Okay. So you said reflection reserves. So the adverse development you took in the quarter didn't reflect

Speaker 3

the I didn't say that, Tracy, but we're not It's going to really go into the drivers. We gave you the big drivers of PYD. We're not going to go into specific coverage issues in PYD.

Operator

Thank you. There are no further questions at this time. I would like to turn the call over to Ms. Abby Goldstein.

Speaker 1

Thank you very much. We appreciate everyone's time. And as always, if If there's any follow-up, please feel free to reach out directly. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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